Google taps CSFB, Morgan Stanley

SAN FRANCISCO (CBS.MW) -- Credit Suisse First Boston and Morgan Stanley will lead the highly anticipated Google initial public offering likely to be announced this week, according to a published report.

A story in the online edition of the Wall Street Journal early Monday, citing people familiar with the situation, identified the two securities firms as the ones chosen for the job -- a prestigious plum that is likely to generate fees of as much as $100 million.

CSFB, the securities unit of Zurich's Credit Suisse Group (CSR: news, chart, profile), and Morgan Stanly (MWD: news, chart, profile) have long been considered top contenders for the Google IPO.

Google could be the biggest dot-com IPO ever, with the potential of raising up to $2 billion and attaining a market cap of $15 billion. But much depends on the pricing of the IPO, and whether Google's price-to-earnings ratio appeals to value-oriented investors seasoned by the lessons of the dot-com bubble.

Google's Web site says the company employs more than 1,000 people and offers stock options benefits to all new hires. It also says the company is profitable, with no specifics.

Besides its employees, Google also has a long line of institutional investors such as marquee venture capital firms Kleiner Perkins, Sequoia Capital, Sun Microsystems co-founder Andy Bechtolsheim, entrepreneur Ram Shriram and others. The first two put in $25 million each back in 1999.

Google, based in Mountain View, Calif., is the most-used site in the world for Web searches, logging more than 200 million searches a day. Google also licenses its technology to scores of companies, including America Online and Yahoo. In addition to the Google News service, it also operates a shopping search service called Froogle.

Google exists to make information accessible and useful. But when it comes to its initial public stock offering, the internet-search powerhouse has created an ultrasecretive process the likes of which Wall Street has never seen.

Google Inc executives banned investment bankers from its California campus in Mountain View last year. Those bankers lucky enough to be briefed on the plans had to sign affidavits swearing they wouldn't leak details to the media. Some early Google investors say they still are in the dark about the IPO plans.

Google is a rare start-up; it wields so much power it has carved its own path through the well-established IPO process. Its distinctive culture and desire for control have reshaped the normally staid system, creating tension between the company and its bankers. The company's expected stock offering comes at a time when Wall Street is still recovering from a series of IPO scandals that reduced the number of new offerings after the tech bubble burst, making bankers more amenable to Google's demands.

Even beyond the IPO, secrecy permeates Google's relations with the outside world. Google won't disclose exactly how many employees it has; "more than 1000" is the stock answer. Nor will it disclose how many computer servers it deploys to respond to millions of daily search requests; "more than 10,000" is the reply. Outside estimates run closer to 100,000.

Until now, Google has wielded its secrecy as a competitive weapon. "One of the luxuries of being a private company is that we can afford to move in a way that as a public company is much more difficult," chief executive Eric Schmidt said in a speech last May.

Founders Sergey Brin and Larry Page have long resisted an IPO - although it will make them billionaires - in part because it will require them to disclose more to outsiders.

publicly traded Google could be in for a shock. For one thing, the company will have to disclose for the first time how much money it makes, and from whom. Moreover, going public will subject its headstrong founders to questioning by investors.

"Google has a very big secrecy problem and a really big communications challenge if they go public without having resolved that," said Matthew Berk, an independent internet industry analyst in New York.

By tomorrow, Google is expected to disclose details about its finances under a Securities and Exchange Commission rule governing closely held companies with more than 500 shareholders.

Remind me of the way that D.E. Shaw ran his company/hedge fund/proprietary trading group in the 90s. I guess some people are very nervous of losing their edges, and will adopt extreme measures to prevent any leak.

That is the message permeating nearly every page of the public offering statement that Google Inc., the Web search engine company, filed yesterday. In a frank and provocative statement, the company's leaders argued that companies cannot manage for the long term unless investors and analysts have limited say in the way they are run.:eek:

In this, they are responding to a widespread belief that investor pressure for predictable short-term earnings growth led many publicly traded companies to engage in accounting gimmickry and business improprieties in the 1990's. Google says that it will not offer quarterly earnings guidance and that it expects shareholders to understand even if it makes unprofitable short-term investments.

"A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour," Larry Page, one of Google's co-founders, wrote in a "Letter From the Founders." The letter, which appeared at the front of the statement, was signed by Mr. Page and his fellow founder, Sergey Brin.

Many institutional investors may cheer that attitude. But another part of the company's strategy will draw some criticism. Google aims to insulate its executives somewhat from shareholder demands. The company will have dual classes of stock that will give company insiders much more voting power than public investors to elect directors. The company's disdain for the traditional stock offering process is also evident. Instead of selling a small number of shares at a predetermined price, which often stokes demand for the stock when it begins trading, Google will auction its shares to the highest bidders. In that way, the windfall profits from the offering will go to the company and its private shareholders, not to favored customers chosen by Wall Street investment banks. In its registration statement, Google explicitly warns investors not to buy the offering in the hope of making a short-term profit by flipping their shares.

Google can behave with so little regard for shareholders' wishes because its business is so attractive that investors will be clamoring to buy stock no matter what conditions the company sets. The company's sales and profits are increasing at a spectacular rate, at least for now, and its profit margins appear to be among the highest in corporate America.

In 2003, Google reported an operating profit of $340 million on sales of $960 million. But the 2003 figure appears to understate the company's cash profit margin, since it includes very high expenses related to stock options that will probably decline in future years. On a cash basis, Google had an operating profit of $570 million in 2003, and an operating margin of 62 percent.

Given those figures, Google will easily command a market valuation of at least $30 billion, and perhaps much more. EBay, which had an operating profit of $660 million on sales of $2.2 billion last year, is valued at $54 billion; Yahoo, with sales of $1.6 billion and operating cash flow $428 million, is valued at $36 billion.

So the offering will make billionaires of Google's top three executives. Mr. Page, 31, and Mr. Brin, 30, each owns about 15 percent of the company, conservatively worth more than $4.5 billion; Eric Schmidt, the 49-year-old chief executive, has stock options on 6 percent, worth $1.8 billion.

Those figures are eye-popping, even in Silicon Valley, which during the 1990's generated fortunes on a seemingly weekly basis. But if the registration statement is a guide, the prospect of riches has not dulled the reservations that Mr. Page and Mr. Brin have about the public markets.

"As a private company, we have concentrated on the long term, and this has served us well," Mr. Page wrote in the public offering statement, which companies must file with the Securities and Exchange Commission before selling shares. "As a public company, we will do the same. In our opinion, outside pressure too often tempts companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to 'make their quarter.' "

I love the way Google has pissed all over the investment banks. No doubt the banks had to swallow and smile because there was a strong potential that Google might bypass them entirely, thereby demonstrating a viable alternative to lining underwriters' pockets and those of their favored clients. In most cases I don't think it ever made sense for issuers to go along with an artificially low issue price, just so the bankers could run the books of a hot issue. Money that should have gone to the company ended up split between the banks and their best customers.

I don't see much of an issue either with their capital structure. Most media companies are set up the same way and no one seems to mind. Look at a POS like DIS. The shareholders can vote, but it does them no good, the Board just ignores them. And almost all institutions vote with management anyway.